Mandatory Elements of a Capital Plan

As noted earlier, a BHC must submit its capital plan and supporting information to the Federal Reserve by April 5, 2016. The capital plan and any supporting information, including certain FR Y-14 schedules, must be submitted to the Federal Reserve through a secure collaboration site. The capital plan rule specifies the four mandatory elements of a capital plan: ¹⁰

1. An assessment of the expected uses and sources of capital over the planning horizon that reflects the BHC's size, complexity, risk profile, and scope of operations, assuming both expected and stressful conditions, including:

   1. Estimates of projected revenues, losses, reserves, and pro forma capital levels--including any minimum regulatory capital ratios (e.g., tier 1 leverage, common equity tier 1 risk-based, tier 1 risk-based, and total risk-based capital ratios) and any additional capital measures deemed relevant by the BHC--over the planning horizon under baseline conditions and under a range of stressed scenarios; these must include any scenarios provided by the Federal Reserve and at least one stress scenario developed by the BHC that is appropriate to its business model and activities.
   2. A discussion of how the BHC will maintain all minimum regulatory capital ratios under expected conditions and the required stressed scenarios.
   3. A discussion of the results of the stress tests required by law or regulation, and an explanation of how the capital plan takes these results into account.
   4. A description of all planned capital actions over the planning horizon.
2. A detailed description of the BHC's process for assessing capital adequacy.
3. The BHC's capital policy.
4. A discussion of any expected changes to the BHC's business plan that are likely to have a material impact on the BHC's capital adequacy or liquidity.

In addition to these mandatory elements, the Board also requires BHCs to submit supporting information that is necessary to facilitate review of a BHC's capital plan under the Board's capital plan rule and in accordance with the FR Y-14 Instructions.¹¹ The capital plan elements described in the CCAR 2016 instructions do not replace the elements that BHCs are required to provide in connection with the FR Y-14, including appendix A to the FR Y-14A which describes the supporting documentation requirements. The mandatory elements of a capital plan overlap with some of these supporting documentation requirements.

The remainder of this section describes in detail the instructions and expectations for the capital plan and provides information on the format that BHCs should use when submitting their capital plans and any supporting information.

Assessment of the Expected Uses and Sources of Capital

BHCs must include an assessment of the expected uses and sources of capital over the planning horizon that reflects the BHC's size, complexity, risk profile, and scope of operations, assuming both expected and stressful conditions.¹² For the purposes of CCAR, BHCs are required to submit capital plans that are supported by their internal capital adequacy assessment and capital planning processes and that include post-stress results for each of the nine quarters under the required scenarios.

The Federal Reserve's evaluation of a BHC's capital plan will focus on whether the BHC has adequate processes for identifying the full range of relevant risks, given the BHC's unique exposures and business mix, and whether the BHC appropriately assesses the impact of those risks on its financial results and capital adequacy.

Estimates of Projected Revenues, Losses, Reserves, and Pro Forma Capital Levels

For the purposes of CCAR, each BHC is to submit its capital plan supported by its internal capital planning process and include post-stress results under various scenarios.

A BHC should clearly identify any aspects of its portfolios and exposures that are not adequately captured in the FR Y-14 schedules and that it believes are material to loss estimates for its portfolios. In addition, the BHC should be able to explain the reason why the FR Y-14 is not accurately capturing such exposures. Some examples may include portfolios that have contractual loss-mitigation arrangements or contingent risks from intraday exposures that are not effectively captured by the FR Y-14 schedules. The BHC should also fully describe its estimate of the potential impact of such items on financial performance and loss estimates under the baseline and stressed scenarios. A BHC should incorporate and document any pertinent details that would affect the production of these estimates.

In conducting its stress tests, a BHC must reflect the regulatory capital rules in effect for each quarter of the planning horizon (other than the advanced approaches or the supplementary leverage ratio), including the minimum regulatory capital ratios and any applicable transition arrangements.¹³

The incorporation of the supplementary leverage ratio into CCAR post-stress capital analysis will not begin in CCAR 2016, and the use of the advanced approaches for calculating risk-weighted assets for projecting regulatory capital ratios has been delayed indefinitely.¹⁴ In addition, Volcker rule deductions from regulatory capital should be reflected on the FR Y-14A Summary Schedule and FR Y-14A Regulatory Capital Transitions Schedule, as appropriate, over the planning horizon.¹⁵ Firms should consult SR letter 15-13 for supervisory guidance on the capital treatment of certain investments in covered funds under the regulatory capital rule and the Volcker rule.¹⁶

BHCs should refer to the FR Y-14A Instructions for information on the required data and supporting documentation to submit for regulatory capital projections.

Discussion of Stress Tests Conducted by BHCs

The capital plan rule requires a discussion of the results of the stress tests required by law or regulation, and an explanation of how a BHC's capital plan takes these results into account. For the purposes of CCAR, each BHC is required to submit the results of its stress tests based on three supervisory scenarios, at least one stressed scenario developed by the BHC, and a BHC baseline scenario. Specifically, a BHC must conduct its stress test for purposes of CCAR using the following five scenarios:

• Supervisory baseline: a baseline scenario provided by the Federal Reserve under the Dodd-Frank Act stress test rules.
• Supervisory adverse: an adverse scenario provided by the Federal Reserve under the Dodd-Frank Act stress test rules.
• Supervisory severely adverse: a severely adverse scenario provided by the Federal Reserve under the Dodd-Frank Act stress test rules.
• BHC baseline: a BHC-defined baseline scenario.
• BHC stress: at least one BHC-defined stress scenario.

Unless otherwise noted in the FR Y-14A Instructions, a BHC's estimates of its projected revenues, losses, reserves, and pro forma capital levels must use data as of December 31, 2015; begin in the first quarter of 2016; and conclude at the end of the first quarter of 2018.¹⁷

The supervisory scenarios used for CCAR are the same scenarios used for the Board's Dodd-Frank Act stress tests. These scenarios are not forecasts of the expected outcome, but are hypothetical scenarios to be used to assess the strength and resilience of a BHC's capital in baseline and stressed economic and financial market environments. Under the Dodd-Frank Act stress test rules, the Board is required to provide BHCs with a description of the supervisory macroeconomic scenarios no later than February 15 of each calendar year.¹⁸

While supervisory macroeconomic scenarios are applied to all BHCs that are part of CCAR, the Board may apply additional scenarios or scenario components to all or a subset of the BHCs in CCAR.¹⁹ One component, a global market shock, will be applied to six BHCs with significant trading operations.²⁰ In addition, the Board will require eight BHCs with substantial trading or processing operations to apply a related scenario component focusing on the default of a large counterparty.²¹

Global Market Shock

The six BHCs with significant trading operations will be required to include the global market shock as part of their calculations of post-stress capital under the supervisory adverse and severely adverse scenarios. The global market shock is a component of the stress test designed to assess potential losses stemming from trading books, private equity positions, and counterparty exposures. A BHC must apply the global market shock to its trading books, private equity positions, and counterparty exposures as of a point in time, which will result in instantaneous losses and a reduction in capital. These losses and the related capital impact will be included in projections for the first quarter of the planning horizon. The as-of date for the global market shock is January 4, 2016.

The global market shock is an add-on component of the supervisory stress scenarios that is exogenous to the macroeconomic and financial market environment specified in those scenarios, and, as a result, losses from the global market shock should be viewed as an addition to the estimates of losses under the macroeconomic scenario.²² Because the global market shock is an add-on component of the supervisory stress scenarios, BHCs cannot assume for the purposes of calculating post-stress capital ratios that there is a decline in portfolio positions or risk-weighted assets due to losses from the global market shock except in the case noted below.

If a BHC can demonstrate that its loss-estimation methodology stresses identical positions under both the global market shock and a supervisory macroeconomic scenario, the BHC may assume that the combined losses from such positions do not exceed losses resulting from the higher of either the losses stemming from the global market shock or those estimated under the macroeconomic scenario. However, the full effect of the global market shock must be taken through net income in the first quarter of the planning horizon, which will include the as-of date for the global market shock.

If a BHC makes any adjustment to account for identical positions, the BHC must demonstrate that the losses generated under the macroeconomic scenario are on identical positions to those subject to the global market shock, break out each of the adjustments as a separate component of pre-provision net revenue (PPNR), and describe the rationale behind any such adjustments.

Counterparty Default Scenario Component

The eight BHCs with substantial trading or processing operations are required to incorporate a counterparty default scenario component into their supervisory adverse and severely adverse stress scenarios.²³ In connection with the counterparty default scenario component, these BHCs are required to estimate and report the potential losses and related effects on capital associated with the instantaneous and unexpected default of the counterparty that would generate the largest losses across their derivatives and securities financing activities, including securities lending and repurchase or reverse repurchase agreement activities. Each BHC's largest counterparty will be determined by net stressed losses, which will be estimated by revaluing exposures and collateral using the global market shock scenario. The as-of date for the counterparty default scenario component is January 4, 2016--the same date as the global market shock.

Similar to the global market shock, the counterparty default scenario component is an add-on component to the macroeconomic and financial market scenarios specified in the Federal Reserve's supervisory adverse and severely adverse scenarios, and, therefore, losses associated with this component should be viewed as an addition to the estimates of losses under the macroeconomic scenarios (see the description of global market shock above).

BHC Scenarios

A central goal of the capital plan rule is to ensure that large BHCs have sound internal practices and policies to determine their capital needs, given each BHC's unique risk exposures and business activities and in line with supervisory expectations and regulatory standards.

For purposes of CCAR, each BHC is required to submit the results of its stress tests based on at least one stress scenario developed by the BHC, and a BHC baseline scenario. A BHC may use the same baseline scenario as the supervisory baseline scenario if the BHC determines the supervisory baseline scenario appropriately represents its view of the most likely outlook for the risk factors salient to the BHC. To gain a deeper understanding of a BHC's unique vulnerabilities, the capital plan rule requires each BHC to design an internal stress scenario that is appropriate to the BHC's business activities and exposures, including any expected material changes therein over the nine-quarter horizon.

BHCs should consult SR letter 15-18 or 15-19, as relevant, part III.E and appendix G, for detailed guidance on developing internal scenarios that focus on the specific vulnerabilities of the BHC's risk profile and operations. While the Federal Reserve expects a Large and Complex Firm to use a range of scenarios to identify and measure potential sources of risks under stress as part of its risk identification and ongoing capital adequacy assessment processes, the firm is required to submit only one internally developed scenario as part of its plan.

Description of All Capital Actions Assumed over the Planning Horizon

As part of the quantitative assessment of a BHC's capital plan, the Federal Reserve considers the BHC's description of all planned capital actions over the planning horizon, including both capital issuances and capital distributions, and relies on these descriptions of the planned capital actions as a basis for its decisions about the BHC's capital plan. A BHC that receives a non-objection to its capital plan generally must request approval from the Board to make capital distributions that exceed those included in its capital plan on a gross or net basis.²⁴ (This is discussed in further detail under "Execution of Capital Plan and Requests for Additional Distributions".)

As detailed in the capital plan rule, a capital action is any issuance of a debt or equity capital instrument, any capital distribution, and any similar action that the Federal Reserve determines could affect a BHC's consolidated capital.²⁵ A capital distribution is a redemption or repurchase of any debt or equity capital instrument, a payment of common or preferred stock dividends, a payment that may be temporarily or permanently suspended by the issuer on any instrument that is eligible for inclusion in the numerator of any minimum regulatory capital ratio, and any similar transaction that the Federal Reserve determines to be in substance a distribution of capital.²⁶

Capital Action Assumptions

BHCs must incorporate assumptions about capital actions over the planning horizon into their company-run stress tests. The types of capital actions that BHCs must incorporate into their projections under various scenarios are defined as follows:

• Planned capital actions: a BHC's planned capital actions under the BHC baseline scenario.
• Alternative capital actions: a BHC's assumed capital actions under the BHC stress scenario.
• Dodd-Frank Act stress test capital actions: capital action assumptions as required under the Dodd-Frank Act stress test rules.²⁷

Planned Capital Actions

As part of the CCAR capital plan submission, except in the case of the BHC stress scenario, BHCs should calculate post-stress capital ratios using their planned capital actions over the planning horizon under the BHC baseline scenario. Similarly, the Federal Reserve will conduct its post-stress capital analysis using the BHC's planned capital actions that are described in the BHC baseline scenario.

With respect to the planned capital actions under the BHC baseline scenario:

• For the initial quarter of the planning horizon, the BHC must take into account the actual capital actions taken during that quarter.
• For the second quarter of the planning horizon (i.e., the second quarter of 2016), a BHC's capital distributions should be consistent with those already included in the capital plan from the prior year and not objected to by the Federal Reserve for that quarter.²⁸
• For each of the third through ninth quarters of the planning horizon, the BHC must include any planned capital actions.

Alternative Capital Actions

In calculating post-stress capital ratios under the BHC stress scenario, a BHC should use the capital actions it would expect to take if the stress scenario were realized. These alternative capital actions should be consistent with the BHC's established capital policies.

Dodd-Frank Act Stress Test Capital Action Assumptions

For stressed projections under the Dodd-Frank Act stress test rules, a BHC must use the following assumptions regarding its capital actions over the planning horizon for the supervisory baseline scenario, the supervisory adverse scenario, and the supervisory severely adverse scenario:

• For the initial quarter of the planning horizon, the BHC must take into account its actual capital actions taken throughout the quarter.

• For each of the second through ninth quarters of the planning horizon, the BHC must include in the projections of capital

  • common stock dividends equal to the quarterly average dollar amount of common stock dividends that the company paid in the previous year (that is, the initial quarter of the planning horizon and the preceding three calendar quarters) plus common stock dividends attributable to issuances related to expensed employee compensation or in connection with a planned merger or acquisition to the extent that the merger or acquisition is reflected in the BHC's pro forma balance sheet estimates;
  • payments on any other instrument that is eligible for inclusion in the numerator of a regulatory capital ratio equal to the stated dividend, interest, or principal due on such instrument during the quarter;
  • an assumption of no redemption or repurchase of any capital instrument that is eligible for inclusion in the numerator of a regulatory capital ratio; and
  • an assumption of no issuances of common stock or preferred stock, except for issuances related to expensed employee compensation or in connection with a planned merger or acquisition to the extent that the merger or acquisition is reflected in the BHC's pro forma balance sheet estimates.²⁹

Organization of Description of Capital Actions

A BHC should align the description of its planned capital actions to the actions submitted on the
FR Y-14A Summary Schedule under the BHC baseline scenario and on the FR Y-14A Regulatory Capital Instruments Schedule, and organize the description of the planned capital actions in a manner that permits comparison with the schedules. One method of organization would be a table, such as table 2, which presents the capital actions by type of capital instrument over the quarterly path.

Table 2. Summary of planned capital actions, CCAR 2016

Item	2016:Q1	2016:Q2	2016:Q3	2016:Q4	2017:Q1	2017:Q2	2017:Q3	2017:Q4	2018:Q1	9-quarter
Dividends
Common dividends/share ($)										n/a
Common dividends
Preferred dividends
Repurchases and redemptions
Common stock issuance
Common stock repurchase (gross)
Common stock repurchase (net)
Preferred stock issuance
Preferred stock repurchase (gross)
Preferred stock repurchase (net)
TruPS issuance
TruPS repurchase (gross)
TruPS repurchase (net)
Subordinated debt issuance
Subordinated debt repurchase (gross)
Subordinated debt repurchase (net)
Other capital instruments issuance
Other capital instruments repurchase (gross)
Other capital instruments repurchase (net)
Millions of dollars

n/a Not applicable.

TruPS Trust preferred securities.

Planned Capital Actions in Out-Quarters of Planning Horizon

A BHC should ensure that its projections of capital distributions in the three final quarters of the planning horizon (i.e., the quarters that are not subject to objection in the current capital plan cycle, referred to as "out-quarters") are based on realistic assumptions about the future and in a manner broadly consistent with previous quarters. A BHC should only reflect a reduction in planned capital distributions in these out-quarters if the BHC has a justification to do so, based on its planned business activities and prudent capital planning. Without explanation, the practice of suddenly reducing planned capital distributions in an out-quarter may be indicative of shortcomings in a BHC's capital planning processes and may indicate that the assumptions and analysis underlying the capital plan, or the BHC's methodologies for reviewing the robustness of its capital planning process, are not reasonable or appropriate.³⁰ Under the capital plan rule, the Federal Reserve may object to a capital plan if the assumptions and analyses underlying the BHC's capital plan are not reasonable or appropriate.

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Description of a BHC's Process for Assessing Capital Adequacy

A BHC's description of its process for assessing capital adequacy is an important component of its capital plan. As discussed in SR letters 15-18 and 15-19, a BHC's capital planning process should have as its foundation a full understanding of the risks arising across all parts of the firm from its exposures and business activities, as well as scenario-based stress testing analytics, to ensure that it holds sufficient capital corresponding to those risks to maintain operations across the planning horizon.

The detailed description of a BHC's capital planning process should include a discussion of how, under stressful conditions, the BHC will maintain capital commensurate with its risks, including above minimum regulatory capital ratios and its internal capital goals. BHCs should primarily refer to SR letter 15-18 or 15-19, as relevant, for additional detail on the supervisory expectations for the capital planning process.³¹

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Expected Changes to Business Plans Affecting Capital Adequacy or Funding

Each BHC should include in its capital plan a discussion of any expected changes to the BHC's business plan that are likely to have a material impact on the BHC's capital adequacy. Examples of changes to a business plan that may have a material impact could include a planned merger, acquisition, or divestiture; changes in key business strategies; or significant investments. For projections under the BHC baseline scenario, a BHC may include all planned mergers, acquisitions, and divestitures that represent the BHC's current view of the most likely outlook over the planning horizon. For projections under all other scenarios, the BHC should include planned mergers and acquisitions, reflecting the terms and conditions that would likely prevail under a given scenario, but only include divestitures that are completed or contractually committed to before the submission date of April 5, 2016.

In the discussion of the business plan change, the BHC should consider in its capital plan the effects of these expected changes and any potential adverse consequences in the event the actions do not result in the planned changes--e.g., a merger plan falls through, a change in business strategy is not achieved, or the BHC suffers a loss on the significant planned investment. In addition, a BHC should reflect material changes to the BHC's business plan in its FR Y-14A Summary and Business Plan Changes schedules, and provide relevant supporting documentation. Upon reviewing this information, the Federal Reserve may request additional information about the business plan change.

BHC subsidiaries of foreign banking organizations (FBOs): A BHC subsidiary of a FBO that will be designated as the U.S. intermediate holding company (IHC) for purposes of complying with the U.S. IHC requirement must include in its capital plan an assessment of how the transfers of subsidiary assets and liabilities in accordance with the U.S. IHC requirement would affect the BHC's capital adequacy over the planning horizon.³² The BHC must also reflect the transfers in the FR Y-14A Summary and Business Plan Changes schedules.

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Organizing Capital Plan Submissions

Appendix A provides a suggested outline for both the capital plan narrative and supporting information, as well as defining the submission components and mapping them to the mandatory elements in the capital plan rule and the FR Y-14A Instructions.

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Data Supporting a Capital Plan Submission

In conducting its assessment of a BHC's capital plan, the Federal Reserve relies on the completeness and accuracy of information provided by the BHC. A BHC's internal controls around data integrity are critical to assure the quality of the capital planning process. The financial records of the BHC should be maintained in such a manner and scope to ensure the FR Y-14 is prepared in accordance with these instructions and reflects a fair presentation of the BHC's financial condition and assessment of performance under stressed scenarios.³³ Further, in SR letters 15-18 and 15-19 III.C, the Federal Reserve clarifies that a BHC should have a strong internal control framework that helps govern its internal capital planning processes, including stress testing performed under the CCAR program, and that framework should include comprehensive documentation of the BHC's policies and procedures.³⁴ A firm's internal audit function should play a key role in evaluating the adequacy of the firm's capital planning process and in assessing whether the risk-management and internal control practices supporting that process are comprehensive and effective. BHCs should refer to appendix E of SR letter 15-18 or 15-19, as relevant, for more information on the Federal Reserve's expectations for internal audit.

A BHC is expected to have procedures in place for meeting the accuracy requirements of the FR Y-14A, FR Y-14Q, and FR Y-14M and should be able to evaluate the results of such procedures.³⁵ As a best practice, these procedures would take into consideration the points in the data compilation and regulatory reporting systems and processes where a material misstatement could occur, as well as controls in place to mitigate those risks. In addition, a BHC should have information about any identified weaknesses in its controls around regulatory reporting and any plans to enhance the control structure around regulatory reporting.

FR Y-14 Data Submission

In general, all BHCs are required to report all data elements in the FR Y-14 schedules; however, certain schedules, worksheets, or data elements may be optional for a BHC. The instructions for the FR Y-14A, FR Y-14Q, and FR Y-14M schedules provide details about how to determine whether a BHC must submit a specific schedule, worksheet, or data element.

BHCs may be asked to resubmit FR Y-14 data--either in whole or in part--after the initial due date as specified in the associated report instructions should errors or omissions be found.³⁶ All resubmissions of FR Y-14Q and FR Y-14M data as of December 31, 2015, will be due on or before March 30, 2016. All resubmissions of FR Y-14A schedules will be due on or before April 25, 2016. (See "Quantitative Assessments" for the treatment of unresolved data issues.)

Under the capital plan rule, failure to submit complete data to the Federal Reserve in a timely manner may be a basis for objection to a capital plan.³⁷ A BHC's inability to provide required data by the due dates may affect supervisory estimates of losses and PPNR for the BHC, and may affect the Federal Reserve's qualitative assessment of the internal risk-measurement and risk-management practices supporting a BHC's capital planning process.

FR Y-14A Summary Schedule Capital Worksheets

BHCs must complete capital worksheets on the FR Y-14A Summary Schedule to report their projections of capital components, risk-weighted assets, and capital ratios under each of the five scenarios described above.

With respect to a BHC's projections under the supervisory scenarios, the BHC must calculate two sets of pro forma capital ratios and complete (1) the Capital - CCAR worksheet (FR Y-14A Schedule A.1.d.1) using the BHC's planned capital actions in the BHC baseline scenario, and (2) the Capital - DFAST worksheet (FR Y-14A Schedule A.1.d.2) using the prescribed assumptions about capital actions under the Dodd-Frank Act stress test rules.

For the BHC-developed scenarios, a BHC should include only the Capital - CCAR worksheet
(FR Y-14A Schedule A.1.d.1), and include projections using the BHC's expected capital actions as deemed appropriate by the BHC for that scenario and in accordance with the BHC's capital policies.

Table 3 illustrates the capital actions used for each scenario's FR Y-14A Schedule.

Table 3. Capital worksheet requirements

Scenario	CCAR capital worksheet	DFAST capital worksheet
BHC baseline	Planned capital actions	n/a
Supervisory baseline*	Planned capital actions	DFA stress test capital actions
BHC stress	Alternative capital actions	n/a
Supervisory adverse	Planned capital actions	DFA stress test capital actions
Supervisory severely adverse	Planned capital actions	DFA stress test capital actions

* If a BHC determines the supervisory baseline scenario to be appropriate for its own BHC baseline, the BHC may submit identical FR Y-14A Summary schedules with the exception of the capital worksheets noted above. All BHCs must complete two capital worksheets for the supervisory baseline and supervisory severely adverse scenario.

n/a Not applicable.

CCAR and Pending Changes in Accounting Standards

The Financial Accounting Standards Board (FASB) has undertaken several projects to revise U.S. Generally Accepted Accounting Principles (US GAAP). These changes will have an impact on BHCs' financial reporting. The FASB has issued or expects to issue new accounting rules associated with revenue recognition, impairment of financial instruments, classification and measurement of financial instruments, and leases. The effective dates for these standards range from fiscal years beginning after December 15, 2017, to fiscal years beginning after December 15, 2020.³⁸

For the purposes of CCAR 2016, a BHC should not reflect the adoption of new accounting standards in its capital projections until the firm has adopted the accounting standard for financial reporting purposes. That is, a BHC should not reflect the effects of adoption of a new accounting standard for a projected period in its FR Y-14 submission if the standard was not effective December 31, 2015. If a BHC has already adopted a particular provision as of the submission date of the FR Y-14A, that adoption should be reflected for the information as of December 31, 2015, and for the subsequent projected quarters.

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References

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